Friday, September 13, 2013

Fallacies of assumptions, discount rates and profits : The Luis Connection

Well, an entire day for my favorite subjects of Managerial Accounting and Investment Analysis. Happy Friday Everyone.

Day started with Luis S. discussing about discount rates for various country specific projects including the emerging countries. We all saw how the discount rates change with change in our assumptions and methods. So, which is the correct discount rate? still remains a big question.

Luis S. explained the effect of assumptions of discount rates and thus the NPV, and also mentioned the multiplier effect an assumption can have on financial decisions.

If this was not good enough, in walks Luis for Managerial Accounting, explaining us various ways of calculating budgets and costs and guess what, he also explains how a simple change in assumption can have multiplier effect on the operating profit. With an example of a beer brewery, he shows us how a slight change in a couple of assumptions can give us as many as 54 different numbers of operating profit, and all of them correct and legal numbers.

Give me a company with no profit but Cash, instead of a company with profits and no Cash - statement of the day, by Luis.

Anyways, although the two subjects discussed different topics, after a long time, I saw a common thread between them - assumptions matter. Make sure you get them right - was the message both my professors were giving us today.

After classes, I went for lunch to the Thai restaurant nearby; where a mishap took place. One of my friends' bag was stolen and then we spent the next hour or so trying to see if we can see at least the empty bag around.

Six PM was the meeting with Prof Alvaro. First meeting after vacations for discussing my fellowship related work. The paper on risk analysis of crowd funding platforms is almost ready to be sent for initial review. After discussing a few updates needed, I came back to MM31 and worked on those updates so that Prof Alvaro can consolidate all the changes soon.

Tonight is the birthday dinner for Nishant. So, not going to be studying much. Happy Weekend folks :-)

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